Issue 75, July 2011
Welcome to the seventh issue this year of the newsletter. The major news of the 2011-12 financial year, now beginning, of course is the announcement about carbon pricing, but it is far from the only issue involving electricity supply. This edition covers a range of matters currently at the top of the industry’s mind – and some more in the shadows.
The federal government has restored activity on the national energy white paper, aiming to produce a draft before the end of 2011 and the final version during 2012.
The initial activity being pursued for Resources & Energy Minister Martin Ferguson by his department under the leadership of Secretary Drew Clarke involves a series of consultations, including the bringing together of a reference group of 25 – and also involving separate meetings with stakeholder industry associations and with NGOs.
Consultation is also to be undertaken with State and territory goverments.
It is believed that the first effort at producing a white paper got as far as delivery of a green paper for in-house consideration by the government before the fall of Prime Minister Kevin Rudd.
The EWP reference group, to be used to provide high level strategic advice says a statement by the Department of Resources & Energy, met for the first time on 14 July in Sydney. It will meet again in August.
The departmental report of the first meeting says that there was general consensus among the group that the white paper should provide policy frameworks within an over-arching strategy for managing future shocks as well as providing clear settings that can act as “forcing functions” to enable markets to evolve and adopt new technologies.
The paper, says the statement, should have a time horizon extending across 2030 and out to 2050.
Powering Australia conference
Federal Resources & Energy Minister Martin Ferguson will officially launch the 2011 edition of the Powering Australia yearbook at a conference to be held in Melbourne on 27-28 September.
The Powering Australia conference will feature papers on electricity technologies, energy efficiency services, research and development, skills needs, dynamic pricing, renewable energy, use of gas for generation, the future of black coal and prospects for nuclear power. It will also includes presentations on rising electricity prices, the proposed introduction of dynamic pricing and the rise of fuel poverty as a social issue.
Speakers will include Dr Bryan Hannegan, a vice-president of EPRI, Energetics director Jon Jutsen, AGL Energy’s Tim Nelson, Port Jackson Partners’ Edwin O’Young, Clare Petre, the NSW Energy & Water Ombudsman, Clean Energy Council CEO Matthew Warren, ERAA’s executive director Cameron O’Reilly and Susan Jeanes, CEO of the Australian Geothermal Energy Association.
The conference will be chaired by Keith Orchison.
Full details of the conference can be found at www.halledit.com.au/poweraust2011.
The new Energy Supply Association yearbook reports that national electricity demand increased by only 0.01 per cent in 2009-10 despite an increase of 1.6 per cent in account-holders. This compared with 1.4 per cent rise in the previous financial year, an indicator of the impact of the global financial crisis on Australian business.
Tasmania, Victoria and New South Wales recorded declines in electricity consumption in 2009-10, with marginal increases in South Australia and Queensland – but demand rose 9.7 per cent in Western Australia (against customer numbers growing at 0.4 per cent, the slowest rate in the country) and 3.3 per cent in the Northern Territory, reflecting the resources boom.
The association says black and brown coal generators accounted for 77.3 per cent of power station output in 2009-10, down from 81.2 per cent the previous financial year, while production from conventional gas and coal seam methane rose to 14.2 per cent. Hydro-electric output increased slightly to 5.6 per cent with wind farm contributions almost doubling to 2.7 per cent.
ESAA reports that 2,760MW of new capacity, predominantly gas plants and wind farms, was under construction in March this year with 5,700MW of projects under advanced planning. Just 391MW of capacity was commissioned in the first nine months of the past financial year.
Treasury modelling suggests the proposed carbon price will be “around $38” per tonne in 2020 – and the Gillard government has allowed for another round of tax cuts in 2015 as part of the compensation package, according to Climate Change Minister Greg Combet.
In a media interview Combet has also held out the prospect that there could be an Anzac emissions trading scheme involving Australia and New Zealand, which has an electricity system that is 70 per cent fuelled by hydro-power. He says there are wider prospects for emissions trading around the Pacific, including Japan and California.
Ziggy Switkowski, former chairman of the Australian Nuclear Science & Technology Organisation and now chancellor of RMIT University, has told a Sydney forum that a carbon dioxide charge “north of $50 per tonne” is needed to change consumer behaviour.
He compared this to a petrol price of $2 a litre most likely being needed to change the community’s approach to using cars.
At the same forum, Martin Ferguson said nuclear power would “kick in” as an option for Australia if renewable sources don’t evolve sufficiently to produce baseload electricity as a reasonable cost.
Switkowski argues that nuclear power could contribute all the additional capacity Australia is forecast to need in the 2020s and 2030s. He says projected demand growth in the near term and out to mid-century could be met by commissioning 1,000MW of nuclear plant annually, starting now.
A plan to build 10 nuclear power stations with a total capacity of 15,000MW, he adds, would have a capital cost of about $40 billion.
In a letter to The Australian newspaper on “Carbon Monday,” Ziggy Switkowski wrote: “There are a number of reasons why Australia might introduce a carbon tax. It might discourage use of fossil fuels, reduce production of greenhouse gases, meaningfully less global warming and directly help our environment.
“The tax might be a desirable structural reform which leads to higher long-term growth in our economy and jobs and better tax efficiency.
“It might ensure we comply with international rules such as could be set by the World Trade Organisation.
“It might be popular and improve a government’s standing with the electorate.
“But the proposed scheme achieves not one of these outcomes.
“Even a cynical view that it’s a revenue grab can’t be right as net carbon tax dollars are at least two election cycles away when the complexion of the the government which might benefit from any windfall cannot be predicted.
“Why then are we being led down this path at this time by such an extra-ordinarily complex program?
“What am I missing?”
Federal Treasury modelling of power prices in the supporting papers for the “Carbon Sunday” announcements indicates an expectation that end-user costs will rise from about $190 per megawatt hour this year towards $250 in the period 2013-17, with the highest impact continuing to come from increasing network charges.
The modelling claims that, across Australia, the carbon price will see household power bills rise on average by $3.30 a week (or $171.60 a year).
Industry modelling of prices in NSW and Queensland has suggested previously that end-user bills could rise from $130 to $140 per MWh in 2008 to around $305 in 2015.
Hole in her bucket Prime Minister Julia Gillard’s carbon abatement strategy, as revealed by this month’s “Carbon Sunday” announcement, depends heavily on one crucial assumption: that there will be an international emissions trading scheme.
The Prime Minister gave a hostage to fortunate in her Sunday euphoria.
She told the media conference on the policy that “you will see 160 million tonnes of carbon pollution reduced by 2020 at least.”
Her political opponents will hang on to that television clip.
The problem with her commitment is that it depends on an assumption by Federal Treasury that there will be an international emissions trading scheme in place by mid-decade.
Through it, the Treasury believes, while the domestic carbon policy delivers only 58 million tonnes of abatement, another 94Mt can be bought abroad.
Treasury had 34 people working on its advice to the government for this announcement over eight months.
Massive resources, but the advice hangs on the assumption – which sceptical observers believe will be very difficult to realise.
Meanwhile, reports from overseas as the Gillard government was preparing the carbon announcement say that it is not feasible for the 27-member European Union to sign up for even a renewal of the Kyoto protocol without progress towards a comprehensive global approach to the warming issue.
As well, chief US negotiator Jonathan Pershing, grandson of a famed American World War 1 general, said after talks in Bonn that the Obama government “was not prepared to have a legal agreement that would apply to us and not to others.”
In response, Su Wei, the chief Chinese negotiator, said the 37 developed nations should go to the next UN summit in Durban, South Africa, on 28 November prepared to extend the Kyoto agreement and to embrace new emissions abatement targets.
Observers see little prospect that Durban can achieve the negotiating breakthrough that eluded UN members in Copenhagen and Cancun.
The federal government used “Carbon Sunday” to produce a flood of announcements about new agencies – the Clean Energy regulator, the Climate Change Authority, the Australian Renewable Energy Authority and the Clean Energy Finance Corporation, leading the Australian Financial Review to ask in an editorial: “Who will run them, how will they interact with the rest of the bureaucracy and how will duplication be avoided?”
The Renewable Energy Authority will oversee existing grants programs and the CEFC is being given a $5 billion pool of funds over five years for renewable projects, raising, as the Review points out, the risk of attempts to pick winners in a volatile market.
There will also be a Clean Technology Program with $1.2 billion to spend over seven years.
John Howard’s former chief of staff, Arthur Sinodinos, a prominent figure in the NSW Liberal Party, describes the CEFC as “a straight pay-off for the Greens and poor public policy.” Sectors not acceptable to the Greens, such as carbon capture and storage, have been excluded from receiving CEFC support, he points out.
The Victorian government is concerned that taxpayers may have to bear between $500 million and $800 million in costs because of the impact of the carbon price on sale of electricity to Alcoa – a deal protected by a contract written by the Cain Labor government in the 1980s. Victorian Treasurer Kim Wells complains that the concern was raised repeatedly with the Gillard government and has been ignored. Climate Change Minister Greg Combet argues that the Victorian claim is “exaggerated.”
The Energy Supply Association has reacted to the carbon price package by acknowledging that some of the announcements are positive for its members, but warns that risks remain for the stable, competitive delivery of power.
It approves of the arrangements for delivery of new renewable energy technologies and of the commitment for a single, national approach to energy efficiency policy, but warns that “a potentially significant impairment of a number of generation assets could send a chilling message” to investors.
ESAA says the policy may mean a few generators are less financially impaired compared to Kevin Rudd’s CPRS proposals, but “a significant number” will receive no compensation and see their asset values diminished.
A critical government decision is its refusal to allow deferred payments for carbon permits, which the association argues means that, in entering forward contracts, generators will need to access more than $10 billion worth of permits. It says that forcing power companies to pay for the permits months, or even years, before they are physically required will place “unmanageable cash flow burden” on generators and make electricity more expensive.
International Power-GDF Suez, owners of Hazelwood and Loy Yang B power stations in the Latrobe Valley, say they are “seriously concerned” by the federal government’s carbon price announcement.
Chief executive Tony Concannon said the east coast NEM had operated successfully since 1998 without an Energy security Council. “Competition and reliability of supply have thrived.” The council would not be needed if the new policy was set correctly.
Concannon warned of a lessening of competition in the east coast market and said the package announced by the Prime Minister fell short of what is needed to avoid financial distress in the generation sector. Loy Yang Power chief executive Ian Nethercote, whose firm operates the 2,200MW Loy Yang A power station, supplying a third of Victoria’s demand, says it will need to buy $450 million worth of carbon permits a year and only part of the cost is likely to be recoverable. The joint venture needs to refinance $565 million of existing debt in November next year and Nethercote welcomes inclusion of a loan support provision in the package, but expresses fears that the scheme will result in a loss of business value.
Meanwhile Liberal Senator Mathias Cormann from Western Australia has said the Gillard government scheme will cost taxpayer-owned Verve Energy about $200 million a year, but will not lead to emissions reductions because because the generator has no means at present of reducing its use of coal. Cormann says Verve’s coal consumption is likely to increase over the decade
The federal government says in its “Carbon Sunday” announcements that its proposed Energy Security Fund will include “scope for payments for the closure of around 2,000MW of very highly-emissions intensive coal-fired generation capacity by 2020.”
The two Latrobe Valley generators most often targeted for closure – Hazelwood and Yallourn – have a combined capacity of 3,080MW. South Australia’s Northern and Playford plants have a combined capacity of 780MW.
Closing, say, Hazelwood and Playford power stations by 2020 would achieve about 20 million tonnes of abatement, less the emissions from 2,000MW of baseload gas plant to replace them, giving a net cut of about 14Mt – against a national 2020 target of 160Mt a year or higher (given the impact of continuing rise in national emissions, driven by population and economic growth).
Meanwhile the Greens are demanding that the Munmorah and Liddell plants in NSW should be shut down, calling for a new solar thermal industry to be established to replace them.
Liddell produces about 10,000 GWh of electricity a year.
It would take 25 Moree solar farms – the project just approved for subsidy by the federal government in north-west NSW – to replace Liddell’s output at a capital cost of $23 billion or about seven times the cost of a CCGT plant.
They would cover the equivalent of 37,500 soccer fields or 30,000 hectares.
The federal government’s current list of large electricity generation emitters is topped by two businesses owned by the NSW government: Macquarie Generation (23.4Mt) and Delta Electricity (20.4Mt) – with the third, Eraring Energy, accountable for 12Mt per year. This represents an initial carbon price liability of $1.28 billion a year. The Queensland government-owned CS Energy is accountable for 16.8Mt with State generators Tarong (8.2Mt) and Stanwell (7.4Mt) – collectively a $745 million liability.
Greg Combet explained the government’s position on the future of domestic coal mining – in the context of a 2050 commitment to slash Australian emissions by 80 per cent – on ABC Radio, Newcastle, on “Carbon Monday”: “The coal that we export – and by and large our coal in the Hunter Valley is all exported – when it is burnt and creates greenhouse gas emissions, it has to be accounted for in the country in which it is burnt. So, if it is exported to China, the Chinese are responsible for the emissions that are created.”
Leading American business analysts Frost & Sullivan, in a new report, say that coal, along with oil, will still be the world’s dominant energy source in 2030.
They forecast that coal will account for 28 per cent of installed electricity capacuty globally in 2030 and more than 34 per cent of power production.
China and India, they add, accounted for 43 per cent of the world’s installed coal-fired power capacity last year and will increase this to 57 per cent by 2030.
The organisers of the annual Australian Energy & Utility Summit, to be held at Sydney’s Luna Park conference rooms from 25 to 28 July, must be thrilled by the co-incident timing of the announcement of the Gillard government’s carbon policies.
The event will provide a platform for both the NSW Minister for Energy, Chris Hartcher, and the Queensland Minister for Natural Resources, Mines & Energy, Stephen Robertson, to canvass their governments’ views on current events.
Among the speakers will be a number of CEOs or senior executives with skin in the game. They include Peter Jackson (Eraring Energy), Carl McCamish (Origin), Mark Collette (TRUenergy), Paul Simshauser (AGL) and Geoff Ward (Geodynamics).
Matthew Warren (CEO, Clean Energy Association) will be there to canvass the renewables sector’s reaction to carbon developments.
Also prominent in the current debate is the cost of network service and the conference will feature talks by George Maltabarow (CEO, Ausgrid), Peter McIntyre (CEO, Transgrid) and John Devereaux (acting CEO, Energy Networks Association).
The program details can be found on the organisers’ website at www.acevents.com.au .
The Minerals Council of Australia claims that the proposed carbon price regime will impose a $25 billion cost on the industry between 2012 and 2020. It labels the policy “a dangerous experiment with the Australian economy,” arguing that the federal government is imposing costs that none of the industry’s international competitors face.
In Brisbane the Queensland Resources Council said the government’s offer to coal miners of $1.3 billion compensation when they are facing an $18 billion cost over 10 years for fugitive emissions is “a drop in the bucket.”
The Australian Aluminium Council says the proposed scheme will impose a carbon cost on local producers of “at least $60 per tonne of aluminium” compared with $8 in China. It forecasts that the local cost will rise to $200 per tonne of aluminium over a decade while the cost in China rises to $60.
Eleven per cent of the electricity sold in Australia is used in aluminium smelting. The metals industry accounts for another 18.3 per cent of power demand.
Federal government carbon policy advisor Ross Garnaut whipped out a media statement on “Carbon Sunday” lauding the Gillard announcement as “strong carbon policy” and claiming that it “will allow Australia to do its fair share in an effective global effort to reduce the risks of climate change and to do so at reasonable cost.”
The Essential Report polling published as the government announced the carbon policy (but recorded before it appeared) showed that the total of respondent opposition to the pricing scheme had risen to a record 53 per cent, with those strongly opposed at a new high of 34 per cent and those strongly supporting the policy at 11 per cent. The poll showed that 20 per cent of respondents planning to vote for Labor opposed the scheme, as did 16 per cent of those supporting the Greens.
The same poll showed respondents split 39 per cent against versus 37 per cent favouring the closure of the Australian coal industry by 2050. Twenty-four per cent of respondents registered a “don’t know vote” while 47 per cent of Labor supporters agreed with the idea.
The latest Newspoll registers 60 per cent opposition to the carbon price plan versus 30 per cent in favour and 10 per cent uncertain. It, too, shows 29 per cent of Labor supporters oppose the concept.
The Clean Energy Council claims that the federal government’s carbon policy “will turbo-charge” renewable energy development in Australia.
The CEC believes the decisions will give renewable investors the long-term certainty they need.
Key announcements under the policy include creation of a $10 billion-funded Clean Energy Fiance Corporation.
The government claims that its policies will drive investment in the renewables sector averaging $2.5 billion annually over the next 40 years.
Electricity is “singularly unsuited” to a major tax as a means of changing either demand or supply unless the impost is at radical levels, says Greg Hunt, the Coalition spokesman on climate action.
Speaking to the Lowy Institute on “Carbon Monday,” Hunt committed the federal opposition to pursue the same 2020 abatement target as the government.
The government’s policy, he says, is essentially an electricity tax that will drive up power bills 10 per cent in its first year.
“Electricity,” he says,”has been historically the largest source of social progress and the largest source of emissions growth. It is both globally and domestically an essential service. In economic terms, that makes it an inelastic good. You can drive up the price of electricity with very little impact on consumption, but a great deal of pain to individuals.”
Hunt says that, if the government has decided not to impose a carbon price on petrol, electricity should be excluded excluded after a 50 per cent increase in price since December 2007.
Under the government’s own scenario, he adds, the move from a carbon price to an emissions trading scheme will see a 60 per cent increase in the tax between 2015 and 2020.
Hunt has also highlighted the impact of higher power bills on 750,000 small businesses, who will receive no compensation.
He argues that the government approach will cause two forms of carbon leakagew – through companies moving operations overseas to escape it and through $3.7 billion a year in transfer payments to other countries under the ETS.
The opposition, he says, will embrace an emissions reduction fund that will alow the market to determine projects with the lowest-cost greenhouse gas abatement.
Commenting on the process, Steve Davies, policy advisor to the Australian Pipeline Industry Association, complains that there is no federal policy, and very few State policies, to encourage the use of natural gas despite geothermal, solar, wind and coal having explicit backing of targeted policies. Targeting transformation The federal government, in its carbon policy announcement, says Australia needs to transform its energy sector “from its current high-pollution mix towards a greater reliance on clean energy sources.”
It makes no mention in the six-page segment dealing specifically with energy that its advice in the national energy resource assessment prepared by Geoscience Australia and ABARES, and published in 2010 taking in to account the proposed CPRS and RET, forecasts that electricity supply in 2030 will still be 80 per cent fossil-fuelled – with 43 per cent of 366,000 GWh of demand coming from burning coal, 37 per cent from burning gas and 20 per cent mainly from wind farms and hydro-electric power plants.
The new paper says Australian generators emit 0.88 tonnes of carbon dioxide on average for every megawatt hours of electricity they produce, making this the “highest-polluting electricity sector” in the OECD.
The commentary cites the emissions per MWh for the US (0.54 tonnes), Britain (0.49) and Canada (0.18) without mentioning the large use of nuclear power in all three as well as substantial recourse to large-scale hydro-electric power plants in Canada.
The government claims that Treasury modelling indicates a cumulative reduction in emissions from electricity generation between now and 2030 of almost 500 million tonnes, without mentioning that this represents a year-on-year average cut of 25 million tonnes. The modelling, as evinced by a figure in the paper, suggests that carbon emissions from power generation will still be about 180 million tonnes a year in 2030. They were 203 million tonnes last year.
Professional services firm Deloitte is urging Australian businesses not to wait until July next year, when the proposed carbon tax is due to take effect, to prepare for the challenges and opportunities on offer.
Deloitte partner Brad Pollock is urging businesses to ensure they understand the impacts, risks and opportunities they face under the new regime. Even companies without a direct carbon price liability will be affected by the indirect flow-through of the costs, he points out.
The export gas industry has objected to being labeled a “big polluter” in the federal government’s carbon policy scheme.
The Australian Petroleum Production & Exploration Association says exporters reject the “politically motivated” label when, for every tonne of emissions created here in producing LNG, 9.5 tonnes of emissions are removed from the atmosphere when the fuel is substituted for coal in consumer countries.
APPEA chief executive Belinda Robinson warns the government that Australian LNG projects are among the world’s most expensive to develop and are not well placed to cope with extra cost pressures. The government decision to review the free permit arrangements for LNg producers in 2014-15 adds to uncertainty for major investors, she says.
Australia’s electricity network operators have rejected assertions that they are driving up power prices unncecessarily by overspending on capital outlays.
Energy Network Association acting chief executive John Devereaux has expressed “disappointment” that the Australian Energy Regulator has “effectively failed to stand by its past decisions and instead suggest that price rises have resulted from excessive spending and that its ability to influence this spending is constrained.”
No government body is in a better position to understand the underlying drivers of network prices than the AER after producing 17 electricity distribution and transmission determinations, Devereaux adds. “Yet for the first time in five years, and in thousands of pages of decisions, the AER now proposes that there is a problem of lack of regulatory power.”
Devereaux points out that governments moved in 2004 to establish a new national regulatory regime for energy networks because they, industry and consumer bodies did not believe that the State-based approaches were delivering outcomes in the long-term interests of users.
“Before rushing to find remedies for rising prices,” he adds, “there is a need to diagnose the problem. For instance, rising network charges under the national regime reflect rising demand, the need to connect renewable energy sources, higher peak power requirements and the need to replace ageing assets.”
The regulators have assessed that $44 billion in capital outlays over five years are needed to meet these challenges, he says. “The increased cost of financing investments have also contributed to higher charges as have increased standards for quality and reliability of supply.”
Devereaux warns that sharp changes to the regulatory regime could actually have the perverse effect of increasing the cost of financing network development because they will reduce confidence in the stability of the regime and promote concepts of regulatory risk.
Meanwhile, in a letter to the Australian Financial Review, Margaret Beardow of Benchmark Economics, former assistant director (economics) of the Electricity Supply Association in the 1990s, has pointed out that the recent fuss about surging industrial input prices pushing up mining and petroleum project costs has also thrown a light on the networks issues.
“In the decade to 2010,” she says, “prices for products such as concrete, oil, steel fabrication, prefab buildings and mechanical equipment jumped by between 160 and 225 per cent. These increases also confront the electricity sector.
“If we add in prices for inputs of special interest to electricity networks – such as copper, up 190 per cent, and transformers, up 184 per cent – it would be surprising if network prices had not increased.”
She argues that the rise in average revenue per kilowatt hour for networks in Queensland, NSW and Victoria has been only 42 per cent between 2000 and 2010, “a long way below the average of input cost increases.
“Electricity pricing is political,” Beardow says, “but electricity is just like any other industry and faces the same cost pressures as BHP and others.”
The Energy Supply Association yearbook forecasts that system energy requirements in the east coast electricity market will increase by 20 per cent over this decade.
It estimates the demand at 246,500 GWh in 2019-20 versus 205,000 GWh in 2010-11.
It also foresees the Western Australian requirement rising from 17,409 GWh in 2010-11 to 24,630 GWh at the end of the decade, an increase of 41 per cent.
The load forecast table, which has a long track record of good accuracy, forecasts that system average load on the east coast will be 30,000MW at the end of the decade, up from 25,640MW at present. Substantial peak load increases are foreseen: almost 18,000MW in NSW (versus 14,700MW now), 14,400 in Queensland (10,000MW now) and more than 11,900MW in Victoria (10,100MW now).
The trio are Australia’s major coal-burning States. NSW and Queensland used almost 50 million tonnes of black coal in 2009-10, a year when demand growth was subdued, while Victoria burned 66.7 million tonnes.
Replacing Yallourn and Hazelwood to achieve carbon abatement, on the ESAA data, will require the construction of about 4,000MW of alternative baseload capacity, almost certainly gas-fired. This would impose a requirement for 280 petajoules of extra gas delivery in the State. ESAA quotes EnergyQuest consultants as estimating that national domestic gas consumption was 1,049PJ in 2009-10, with Victoria accounting for 208PJ.
In other words, helping to deliver the national emissions target for 2020 by closing to two large coal-burning power stations will require a doubling of gas delivery in Victoria inside this decade.
At the same time, if it is not to build further coal-fired plant to meet demand and if it is to close its oldest and most emissions inefficient plant to contribute to the abatement target, NSW, on these numbers, will need about 250PJ of extra gas supply, too, by the decade’s end.
There are almost 600,000 transformers embedded in the east coast electricity network to bring power to some 19 million customers.
The ESAA yearbook calculates that the transformer tally in the so-called “national” market on the east coast stood at 599,334 in 2009-10 with another 31,397 in service in the WA transmission and distribution system and 4,115 in the Northern Territory.
More than half the transformers are located in two States – NSW and Queensland, with the former have 201,092 and the latter 135,607, a reflection of their dominance in the electricity market.
The yearbook reports that the two States and the ACT (which is included in NSW data) account for 5.37 million of the 10.17 million power accountholders, including 4.8 million of the nine million households, and almost 58 per cent of total electricity consumption.
Citipower has commissioned a $55 million substation in the heart of Melbourne. The Southbank development is a key new hub to ensure the security and reliability of electricity is one of Australia’s busiest inner city precincts. Among the technology innovations incorporated in the substation is enclosed gas-insulated switchgear, requiring less maintainence. The substation has almost three times the capacity of its predecessor.
Companies, including State-owned businesses, have an astonishing 14,761MW worth of development plans for NSW, the ESAA yearbook reports. The State’s current capacity is 16,355MW.
How and when many of these developments will proceed is an open question, but the list illustrates that the country’s largest power region has no shortage of options for future supply provided the policy and economic stars align.
A substantial part of the list is contributed by just two developments – the competing projects of 2,000MW at Bayswater B and Mt Piper 2. Both are unlikely to proceed and it wholly unclear as the new O’Farrell government settles in to office what its views are on which project to support or which fuel.
The Macquarie Generation proposal at Bayswater is for ultra-supercritical coal plant or CCGT, while, as a result of the Keneally government privatisation deals last year, the Mt Piper development alongside the existing Delta Electricity complex is now listed as being in the hands of TRUenergy and is only designated as a coal project. When originally put forward by government-owned Delta, it, too, was a coal or gas proposal.
Another big ticket development on the ESAA list is the 1,000MW Silverton wind farm in western NSW, described as being under advanced planning. However, the current state of the RET program, with its depressed REC prices, suggests that the given “proposed commissioning year” of 2011 is rather fanciful.
Also listed as under “advanced planning” are ERM Power’s 660MW Wellington gas plant, TRUenergy’s 300MW to 450MW Tallawarra B gas plant, AGL Energy’s controversial Leafs Gully 360MW gas peaking plant in Sydney’s Camden Valley and AGL’s proposed Dalton gas plant (from 250MW to 780MW) west of Goulburn. Others included are Infratil Energy’s 450MW Bamarang open cycle gas plant near Nowra and TRUenergy’s proposed double-stage gas developments at Marulan, off the Hume Highway, with a total capacity of 750MW.
The Bamarang site was acquired by New Zealand-owned Infratil for $9 million in the Keneally government garage sale of late 2010. It was previously part of the Delta Electricity portfolio. Located 160km south of Sydney, it is described by Infratil CEO Darryl Flukes as a quality site for development because of its proiximity to gas and water pipelines as well as to the high voltage network. Wind Prospect is on the list with a 270MW wind farm at Boco Rock north of Bombala and its 485MW Sapphire wind farm west of Glen Innes.
Tucked away in the NSW list is Australia’s largest current coal-fired project, the expansion under way of the State government-owned Eraring Energy’s capacity through upgrading its existing units in the Lower Hunter Valley.
The yearbook’s reference to 720MW for the project is misleading because, in fact, what is occurring is the upgrading of four 660MW by 60MW each at a cost of $600 million. The project is scheduled for completion in September next year and is said by the company to enable the power station’s life to be extended by 20 years Eraring says that, when completed, the upgrades will make the power station one of the most efficient coal-fired plants in the country in terms of energy conversion and carbon dioxide emissions.
Professor Quentin Grafton has been appointed inaugural chief economist of the federal government’s new Bureau of Resource & Energy Economics, which began operation at the start of the financial year. BREE is designed as a professionally independent agency within Martin Ferguson’s Depart of Resources & Energy, initially staffed by people transferred from ABARES, to produce resources and energy analysis and publications.
Grafton takes up his post in August. He is currently at the Australian National University.
Dash for power Martin Ferguson has pointed to the International Energy Agency forecast that global demand for electricity will rise faster than any other final form of energy this century in a speech on energy security for Australia in a carbon-constrained world.
Speaking in Melbourne, the federal Resources & Energy Minister has also pointed out that more than 80 per cent of the growth in power demand will be in non-OECD countries over the next 25 years, driving nearly all the incremental requirements for coal and an a substantial factor in increasing demand for LNG.
Ferguson highlighted the implications in Australia of higher global energy demand leading to greater dependence on foreign investment and on locating skilled workers. He noted that more than half of all loan funds for local energy and utilities businesses come from foreign banks – and that we are not only competing internationally for capital, but for people, with 75 major resource projects now at an advanced stage of development needing 65,000 skilled workers.
Ferguson noted that rising electricity prices have lead to some querying the benefits of the reforms in power supply over the past two decades. He warned against allowing the pricing concerns to undermine the long-term efficiency of the supply system. “As history has shown,” he said,”artificially holding down prices will lead only to sharp pain when eventually they are reset to reflect costs.”
Brendan Dow, CEO of Ceramic Fuel Cells Limited, says adoption of his company’s BlueGen system by just five per cent of Australian homes would allow the addition of 700MW of controlled generation with no additional grid investment and no government subsidies.
Writing in EcoGeneration magazine, Dow says households and small businesses currently have very limited ability to respond to power prices, which are forecast to be double their 2008 levels in 2015. The dishwasher-sized, gas-fuelled BlueGen units, he adds, can produce twice as much power as the average Australian home needs each year and excess output can be sold to the electricity grid. The sales price need not be more than the current standard retail rate of about 20 cents per kWh.
Where coal-fired power is the source of electricity, this also would reduce greenhouse gas emissions by 14 tonnes a year per household.
Dow says widespread adoption of the “mini power stations” could also make inroads in to network line losses. In 2007, he points out, transmission and distribution losses were seven per cent of all output, or 17,910 gigawatt hours, equal to the annual needs of three million homes.
Shane Breheny, CEO of Citipower and Powercor, says the Victorian trial roll-out of advanced metering infrastructure is “strongly in the public interest” and will provide the foundation for wide-ranging and necessary innovations in delivery and consumption of energy over the next two decades.
Writing in the twin companies’ annual report, released in June, Breheny, who is also the current Energy Networks Association chairman, says the Victorian “smart meters” roll-out – his company has supplied 200,000 of the half million meters so far installed by the State’s distributors – is the biggest and most complex infrastructure project undertaken by the State’s power supply sector.
He acknowledges that the complexity and time scale of the program, the change of government in the State, rising energy prices and the absence of a government community education program have all contributed to public uncertainty about the roll-out.
Meanwhile Ausgrid CEO George Maltabarow, Breheny’s predcessor as chairman of ENA, writing in the Sydney Morning Herald, has spoken of four State and federal schemes driving up electricity costs in his franchise area as well as the City of Sydney pursuing its own large scheme. “This,” he says,” is not the most cost-effective way of reducing greenhouse gas emissions.”
Maltabarow says Ausgrid’s modelling shows that households could save $50 a year in power bills under a single green scheme – and they could save another $1.7 billion a year if peak demand could be reduced.
Peak demand, he says, has been growing much faster than average consumption. It has grown 70 per cent over 20 years and, other than the need to replace aged assets, is the main driver of network investment. He estimates that about $11 billion of electricity infrastructure nationally is now used for only 100 hours a year.
He argues that time-of-use pricing and “smart meters” can help to reduce electricity use during peal periods by offering a financial incentive to consume outside these times.
Melbourne’s Herald-Sun newspaper claims that a report to the Victorian government by a task force appointed to investigate a Black Saturday fires proposal has estimated the cost of buring cables at more than $20 billion and said that its implementation could add $740 annually to rural and regional household bills for ten years.
The new State government led by Ted Baillieu promised before the past election to support all the Black Saturday royal commission recommendations, including the call for burying cables in rural areas. The former Brumby government rejected this recommendation on the grounds that it would be too expensive.
The task force’s final report is due to be delivered to the government in September.
A report prepared for the Energy Users Association by Deloitte Access Economics says that recent power prices rises have set costs for industrial users that are now higher than in some Asian economies such as South Korea. Trade-exposed Australian industries reliant on competitively-priced electricity are having this advantage eroded.
The Deloitte study finds that electricity prices for both industrial customers have increased by 30 per cent in real (inflation-adjusted) terms since 2006.
Looking at the renewable energy target, the Deloitte consultants say it will impose a carbon abatement cost of $60 per MWh until 2018 and then rise to a tax-effective penalty rate of $76. They also believe that the RET scheme in its present guise will fall about nine per cent short of its goal of 45,000 GWh by 2020 because of problems caused by the generation of RECs under the small-scale renewables scheme.
Deloitte estimate the cost of abatement under the RET at around $87 to $115 per tonne by 2020. The study suggests that achieving the 2020 national abatement target will need to be around $45 per tonne by 2020 (considerably more than the carbon price announced by the federal government in July).
The Australian Industry Greenhouse Network wrote to the Prime Minister in late June to point out that the report on international measures the government had commissioned from the Productivity Commission had estimated that policies across nine countries were saving just 210 million tonnes of carbon dioxide for an annual cost of $18 billion.
“On a country comparison basis,” wrote AIGN chief executive Michael Hitchens,”Australia is about average in terms of the amount of money spent on bad policies – and Germany is way ahead of everyone else on this score.”
Hitchens pointed out that the Productivity Commission report supported its argument that it is in Australia’s interests to encourage global action on emissions mitigation because, without it, there could be no environmental benefits for this country.
The report, said the letter, “busts the myth” that Australia’s target of reducing emissions to five per cent below 2000 levels by 2020 represents a “laggard” approach.
The disintegration of the six-year-old Roaring 40s agreement between TRUenergy and Hydro Tasmania has seen the Australian subsidiary of China Light & Power acquire ownership of Waterloo wind farm and a 50 per cent share of the Cathedral Rocks wind development, adding 144MW to its generation capacity.
In addition, TRUenergy has acquired 400MW of projects at different stages of development.
The degree of difficulty the media has in covering the Gillard government’s carbon price policy in a form understandable in the community is encapsulated by an editorial in a major newspaper on “Carbon Monday” opining that the immediate aim, a 160 million tonne cut in emissions by 2020, appears achievable.
I read this on a train going in to the Sydney CBD immediately after seeing a magazine commentary, dealing with relations with China, that expressed the view that Julia Gillard, like Barack Obama, has excessive faith in multilateral processes and international covenants.
This is true of the carbon policy, which the government itself says will deliver just 58 million tonnes a year of abatement by 2020 within Australia’s borders and will rely on international emissions trading to deliver 102 Mt annually.
Except, of course, that the target – five per cent below 2000 by 2020 – won’t be 160 million tonnes at the end of the decade. It rose from 144Mt when Kevin Rudd first put it forward three years ago to the present level, estimated by the government earlier this year, and will rise again over this decade as population and economic growth continue to drive energy demand.
It is likely to be about 200 million tonnes in 2020 – so, on the Gillard plan, the volume of emissions credits to be sought overseas is likely to be about 142Mt.
With theTreasury modelling suggesting the carbon price will be around $38 per tonne by 2020, this will require emitters spending more than $5 billion a year overseas at the decade’s end out of some $13-14 billion being outlayed annually.
Except that the government apparently will only allow them to source half their emissions credits overseas.
One way or another, it seems likely there will be tears before this bedtime.
As reported above, and a point not widely canvassed at the time of writing, Climate Change Minister Combet is hopeful that we will be in an emissions pool with at least New Zealand by then – and other parts of the Pacific in due course.
However Warwick McKibbin, director of the ANU School of Economics, a professorial fellow at the Lowy Institute, co-director of the climate and energy economics project at the Brookings Institution in Washington DC and until recently a member of the Reserve Bank board, argues that a high reliance on foreign permit purchases carries both an environmental risk (the permits may not actually reduce emissions in their country of source) and an economic risk in that a large volume flowing in to Australia could destabilise the local carbon price.
The latter is hardly a hypothetical point given the volatility of overseas carbon markets.
As well, Geoff Carmody, a former senior officer in Federal Treasury, argues that the proposed scheme is the antithesis of “the broad base,low rate golden rule for tax design and pricing carbon.”
The government’s approach, he says, has set up a situation where incentives for households to reduce consumption, and emissions, will be countered by higher income incentives to increase it.
As far as the approach producing certainty for business is concerned, Carmody and others point out that emissions caps after 2015 have not been decided and therefore we don’t know what the post-2015 carbon price will be. He also notes that the government has not come clean on what emissions price is needed to attain the 2020 five per cent target.
Meanwhile even independent Tony Windsor, who supports the scheme, disputes Julia Gillard’s claim that petrol will be excluded from the tax “forever.”
Carmody is right to assert that the ostensible purpose of the policy – to reduce emissions cost-effectively – is lost in its complexity. In future, he warns, the policy will either remain an ineffective response to abatement or the emissions price will need to increase – a lot.
Lastly, of course, far from driving Australia towards “securing Australia’s clean energy future” – a slogan picked to replace the dumped Rudd carbon pollution reduction scheme, undoubtedly as a result of more focus group testing – the government’s own energy resource assessment, published a year ago, and using the similar impact of the CPRS as a template, is telling it that electricity will still be 80 per cent fossil-fuelled in 2030.
And it surely can’t expect to implement a shift to electric vehicles if it has eschewed a carbon price on petrol “forever.”
Far from being a bold and imaginative thrust forward in the image of past major reforms, this is a severely over-egged pudding of a policy that threatens to give the nation severe indigestion.
Keith Orchison
11 July 2011
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